Copa Holdings (CPA 2.14%), operator of Latin America's Copa Airlines, has had a pretty good year so far. A resurgence in passenger demand has helped the company post back-to-back quarters of impressive earnings. As a result, Copa's stock is up 36% year to date.
With the company scheduled to report its third-quarter earnings on Nov. 8, here are the items I'll be looking for to see if the airline can keep its positive momentum going.
Will economic conditions keep improving?
In 2015 and 2016, the economies in many of Copa's key markets crumbled, causing a severe drop in demand. The rebound in passenger yields -- the average price paid per mile, per passenger -- began late last year, and that trend has continued in 2017 thanks to stabilizing Latin American currencies and a return to regional economic growth.
Image source: Copa Holdings.
In Q2, Copa said it was seeing overall positive growth in nearly every one of its markets, and the company expects demand to continue improving through the rest of the year. The data backs up this sentiment. According to Focus Economics, the Latin American economy expanded by 1.1% in Q2, the largest increase in more than three years. And the International Monetary Fund now projects Latin American GDP growth of 1.2% in 2017 and 1.9% in 2018.
What to watch for: Any management comments on Copa's larger markets -- particularly Brazil, as well as any changes to Copa's sunny outlook for passenger demand through the remainder of the year.
How's the revenue picture looking?
In Q2, Copa's revenue rose 16.8% to $578.1 million, with yields rising 3% and unit revenue -- also called revenue per available seat mile (RASM) -- up 7.5%. Every one of those metrics also saw an acceleration from the company's Q1 numbers.
With Copa's business seemingly growing stronger each quarter, could we see an across-the-board acceleration once again? That looks unlikely. Analysts are, on average, expecting Q3 revenue of $642.9 million, which would represent 13% year-over-year growth -- a slight deceleration from last quarter.
What to watch for: Whether the company meets top-line estimates is less important than whether yields and unit revenue continue to trend in the right direction. In addition, Copa is guiding for full-year 2017 RASM growth of roughly 3%, so look for any updates to that estimate.
Can operating margin live up to management's targets?
Before 2015, Copa was regularly enjoying operating margins of 19% and above. But during 2015 and 2016, that figure fell to the 12% range. With demand now returning in a big way, Copa's fares have risen while the company continues to do an excellent job managing its operating costs -- paving the way for significant margin improvement.
Last quarter, management raised its full-year operating margin to a range of 16%-18%. And in the longer term, the company believes it can get its margins back to -- and possibly above -- historical norms, as it aims for the 20% range.
What to watch for: Keep an eye on Copa's unit costs excluding fuel -- also called cost per available seat mile (CASM), ex-fuel. With unit revenue still in expansion mode, Copa's ability to hold the line on its unit costs is what creates the opportunity for those big margin gains.
Even after the strong run-up in its share price this year, Copa is trading at a forward P/E of roughly 15. For a company that's been firing on all cylinders again, that simply seems too low to me. As long as Latin American economic expansion continues, Copa looks to be in a great position to benefit from increasing demand for air travel.
